1. Introduction: “What Is Poverty and Who Are the Poor? ”

2. 1,400,000,000 $1.25/day 1 Billion People Live in “Extreme Poverty” World Bank 1,000,000,000 $1.00/day World Bank 2010

3. Economic Terminology Income Wealth GDP (Gross Domestic Product) Per capita GDP Why do we use GDP to measure poverty?

4. Economic Terminology Absolute Poverty – measured against a designated minimum threshold of material well-being. The incomes of the poor fall below the minimum threshold. –Current standard = $1/day PPP Relative Poverty - identified by comparing levels of material well-being experienced by different individuals or groups, rather than by comparing the level of well-being to a standard.

5. Consumption Measure of Number of Poor by World Region Poverty Can Be Measured by Either Output (GDP) or Consumption Regions200052008 East Asia and the Pacific 332 million284 million Eastern Europe and Central Asia 6 million 2 million Latin America and the Caribbean 48 million 37 million Middle East and North Africa 11 million 9 million South Asia 598 million571 million Sub-Saharan Africa 395 million386 million Total 1.39 billion1.289 billion Reduction in number of poor, 2005-2008: 101 million Sources: World Bank Poverty and Inequality http://www.worldbank.org/Data/Views/Reports/TableView.aspx (May 1,2012 http://www.worldbank.org/Data/Views/Reports/TableView.aspx

6. Countries of the World; Low, Middle and High Income

7. The number of extreme poor has declined by 500 million since 1981

8. Share of World Population in Poverty, 1820 – 1998 ($1/day) World BankDavid Dollar, Development Research Group, World Bank. “Capitalism, Globalization and Poverty.” unpublished paper, written for The Foundation for Teaching Economics, March, 2003, p. 27

9. Number of People Living on Less Than $1 Per Day, 1820 - 1998 1980 World BankDavid Dollar, Development Research Group, World Bank. “Capitalism, Globalization and Poverty.” unpublished paper, written for The Foundation for Teaching Economics, March, 2003, p. 27

11. World Bank 2009

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13. Height Is a Proxy for Economic Well-Being

14. ~1750

15. Years of Life Expectancy at Birth Place Middle Ages Select Years1950-55 1975-80 2005-10 France~30 (1800)6674 81 UK20-30~36 (1799-1803) 6973 79 India25 (1901-11) 39 53 64 China25-35 (1929-31) 41 65 73 Africa38 48 51 World20-3046 60 67 Sources: Lee and Feng (1999); Peterson (1995); Wrigley and Schofield (1981, 529); World Resources Institute (2011); UNDP (2002) http://hdr.undp.org/statistics/data/indic/indic_1_1_1.htmlhttp://hdr.undp.org/statistics/data/indic/indic_1_1_1.html

16. Real Gross Domestic Product Per Capita (1990$ International PPP) Area1000150017001820195219952001 Europe$400~$6408701,1304,37013,95019,256 USA6001,26010,65023,38027,948 India530 6101,5701,957 China450600 5403,2003,583 Africa400 1,2201,489 World4205506006702,2705,1906,049 Sources: Maddison (1998, 1999) Development Centre Studies The World Economy: Historical Statistics, Maddison, 2003.

17. Real Gross Domestic Product Per Capita (2005$ International PPP) 1995200120072010 Europe$24,67428,36430,78929,765 USA 33,90339,60241,26040,650 India 1,452 1,832 2,685 3,240 China 1,849 2,868 5,239 6,810 Africa 1,498 1,589 1,914 2,022 World 7,037 7,955 9,535 9,869 Sources: Maddison (1998, 1999) Development Centre Studies The World Economy: Historical Statistics, Maddison, 2003.

18. Number of People Living on Less than $1.25/day (millions) 19811990199920052008 East Asia & Pacific 1,096926656332284 Sub-Saharan Africa 205290376395386 Source: World Bank Poverty and Inequality Database http://databank.worldbank.org/Data/Views/Reports/TableView.aspx (April 30, 2012) http://databank.worldbank.org/Data/Views/Reports/TableView.aspx The Good News and The Bad News

19. David Dollar, Development Research Group, World Bank. “Capitalism, Globalization and Poverty.” unpublished paper, written for The Foundation for Teaching Economics, March, 2003, p. 24.

20. What does Capitalism have to do with Poverty?

21. 21 Measurement: Fraser Institute Economic Freedom: Size of government and taxation Protection of private property and the rule of law Soundness of money Trade regulation and tariffs Regulation of business, labor and capital markets

22. 22 Background: Economic Freedom Project 25 year project uTransparency is a highly valued part of the project Based entirely on third party data from World Bank, International Monetary Fund (IMF), Global Competitiveness Report, etc. (based on both objective and survey data) uWe rank 141 countries representing 95% of the world’s population according to the extent to which they permit their citizens to be economically free

23. Per Capita Income and Economic Freedom Quartile Most Free ……………. Least Free Sources: The Fraser Institute; The World Bank, World Development Indicators, 2011

24. Overall Economic Freedom Index: Top Ten Source: The Fraser Institute 2011.

25. Overall Economic Freedom Index: Bottom Ten Source: The Fraser Institute 2011.

26. Per Capita Income and Economic Freedom Quartile Most Free ……………. Least Free Sources: The Fraser Institute; The World Bank, World Development Indicators, 2011

27. 27 Most Free …………….. Least Free Sources: The Fraser Institute; The World Bank, World Development Indicators, 2011. Income Share of the Poorest 10% and Economic Freedom

28. Income of the Poorest 10% and Economic Freedom Most Free ……………. Least Free Sources: The Fraser Institute; The World Bank, World Development Indicators, 2011.

29. 29 Most Free ……………..…… Least Free Sources: The Fraser Institute; The World Bank, World Development Indicators, 2011. Growth in Real GDP Per Capita (developing nations) and Economic Freedom Quartile

30. 30 Most Free ……………. Least Free Sources: The Fraser Institute; The World Bank, World Development Indicators, 2011. Life Expectancy at Birth and Economic Freedom Quartiles

31. 31 Most Free …………………. Least Free Sources: The Fraser Institute; New Economic Foundation (2009), The (un)Happy Planet Index 2.0. Why good lives don't have to cost the Earth. Economic Freedom and Life Satisfaction Higher values indicate higher levels of satisfaction

32. 32 EFW map

33. Economic Growth improves the lives of the poor by making the pie bigger Bigger “slices” mean higher standards of living

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35. Institutions: the formal and informal “rules of the game” that shape incentives and outline expected and acceptable forms of behavior in social interaction. Private Property Rights Rule of law Open, competitive markets Entrepreneurship and innovation Proposition: A nation’s institutions determine its ability to reduce poverty.

36. Institutions: the formal and informal “rules of the game” that shape incentives and outline expected and acceptable forms of behavior in social interaction. Private Property Rights Rule of law Open, competitive markets Entrepreneurship and innovation Proposition: A nation’s institutions determine its ability to reduce poverty.

37. Institutions: the formal and informal “rules of the game” that shape incentives and outline expected and acceptable forms of behavior in social interaction. Private Property Rights Rule of law Open, competitive markets Entrepreneurship and innovation Proposition: A nation’s institutions determine its ability to reduce poverty.

38. Lesson 2: “Property Rights and the Rule of Law” Property Rights Property Rights benefit the poor by making owned capital secure and productive.

39. Formal Legal Characteristics Definable Enforceable Transferable

40. An Important Note The term “Property Right” is shorthand for Human Rights. –The right to freely use and transfer possessions including yourself. People, Not Property. –Recognition of people’s right of ownership to themselves and their labor.

41. Defined but not Enforced A right that is defined but not enforced is useless. defending & enforcing Property Rights is paramount

42. Property Rights and Growth Property Right holders have an incentive to preserve their property. Owners consider the future. Owners will improve a property. –The value of improvements reside with the owner.

43. Investment Secure property rights make investment more likely. Property Rights allow people to obtain debt. –Use of past and future incomes. –Collateralization is of greatest benefit to the poor.

44. Property Rights and the Poor Property Rights are of the greatest benefit to the poor. –The rich can enforce rights over their property. –The poor cannot. The definition and enforcement of Property Rights gives the poor the same right enjoyed by the rich. Secure property rights also contribute to economic growth by enabling the poor to shift effort from protective to productive activities.

45. Enforcing the Rules Rule of Force –Anarchy Rule of Men –Laws are enforced at the good will of the enforcer. Rule of Law –Both the governed and the governing are ruled by the same laws.

46. Big Picture Rights to property promote economic growth by encouraging preservation, improvement and investment in owned resources. In societies without clearly defined property rights the poor are disadvantaged because they lack the resources to enforce their rights.

47. Big Picture To effectively stimulate economic growth property rights must exist within a society characterized by stable and predictable rules of law.

48. Lesson 3: “Competition Opens Markets to the Poor” The Role of Competition

49. To Compete or Not? The question is not whether we shall have competition, but what forms it will take. - Paul Heyne Competition will always occur. –Scarcity We cannot fulfill all our wants at no cost.

50. Non-Market Competition What determines participation? –Connections –Wealth –Etc. What determines production? –No effective production signals. –No effective incentives to innovate.

51. Market Competition –Suppliers compete with Suppliers. –Demanders compete with Demanders –All are trying to Maximize Profits Profits draw a crowd –It is about increasing revenue and lowering costs.

52. Revenue and Costs Since demand curves slope downward, for producers, there are three ways to increase profits. –Sell more at lower prices. –Lower costs –Innovate new goods that can command a premium.

53. Prices and Production Prices are determined by the interaction of the Supply and Demand for a good. D S PePe QeQe D S PePe QeQe P2eP2e Q2eQ2e An Increase in the Supply of a good increases quantity traded and lowers price

54. More SellersMore Supplied at Lower Prices

55. Innovation = Lower Costs = Increased Supply $$$$$ $$$ $ 23 1

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58. Construction Engineering

59. Opportunity The greatest impact on the poor comes from the opportunities that competitive markets provide. –Employment – Increased output – increased labor usage. –Entrepreneurship – The poor can get in the game – not restricted to approved classes.

60. Case Study – Opening Markets in China 1977-78 250 million Chinese peasants with incomes below the country’s official poverty line of approximately 70 cents (U.S.) per day. 600-700 million Chinese living on less than $1 per day, the commonly used international poverty line. Most of the population were peasants, herded together into communal farms. This system produced very poor economic results with widespread poverty and periodic famines.

61. Case Study – Opening Markets in China 1978 Economic reforms begin: limited property rights and open markets Communes were broken up and families given individual plots of land and families were allowed to sell some of their output in farm markets. The right to enter the market with their produce drastically changed the incentives facing Chinese farmers. This institutional reform led to a dramatic surge in grain production in China and fueled spectacular poverty reduction.

63. The Big Picture Competition and Markets benefit the poor by –Providing more goods at lower prices. –Increasing the quality and variety of goods available. –Providing opportunities for work. –Stimulating entrepreneurial activities. –Unleashing the talent and abilities that were always there.

64. Economic Growth Overcomes Poverty Markets create wealth and foster economic growth Conclusions and Caveats

65. Provide the Framework and Incentives for the Creation of Wealth Property Rights Rule of law Competitive markets Entrepreneurship / Innovation Institutions of Capitalism

66. Questions that Remain Unequal Income Distribution Income Mobility Individualism of Property Rights Barriers to the Institutions of Capitalism

67. Institutions of Capitalism The Mix Importance of the Rule of Law

68. Capitalism and Markets Lock us in mutual dependence Promote other regarding behavior Foster a civil society where anonymous cooperation is the norm Benefit the poor in ways that are most important to them, providing Wealth, Dignity, and Mobility